Why Facebook Should Buy Twitter

Menlo Park, Calif.-based Facebook Inc. (Nasdaq:FB) and Twitter Inc. (NYSE:TWTR) are considered by some to be the perfect social media match. Their services and revenue streams are complementary so a linkup could be the solution to some of their challenges, notably, Twitter's slowing traffic growth and share price and Facebook's fading hipness and difficulty in rolling out new, traffic-generating services.

While Twitter has plenty going for it, its 255 million monthly active users pale in comparison to Facebook's 1 billion. Though Twitter posted a 25% growth rate in users in the most recent quarter, investors were disappointed that the figure was below the 30% gain seen in the fourth quarter. The San Francisco-based company’s fading user growth was amid a large number of “tweetable” events in the quarter such as The Oscars, the Olympics and The Super Bowl, making the lower-than-expected numbers even more worrying. Once growth starts to slow in high-flying companies – even by a little bit – it’s hard to speed it back up. Twitter's shares were hammered as a result of the disappointing results, plunging more than 40% this year.

Unless Twitter CEO Dick Costolo has some secret monetization trick hidden up his sleeve, his options are limited. As recently as December, Twitter's shares traded at the $75 level. They've since dropped to below $40, but with a forward price-to-earnings multiple of over 700 (it has yet to post a profit), the shares still aren’t cheap. Facebook CEO Mark Zuckerberg could decide to gamble on Twitter anyway. After all, he recently paid $19 billion for WhatsApp, a popular but thus far unprofitable messaging service. Twitter's market capitalization of $22.5 billion amounts to pocket change for a company such as Facebook.

A Happy Coupling?

Facebook generated $2.27 billion in advertising revenue in the first quarter, a rise of 82% from the same period last year. Twitter’s $250.5 million in revenue in the first quarter pales in comparison but represents a gain of more than 125% from last year. That growth rate can be attributed to its strength in fast-growing mobile advertising. Some 80% of Twitter's ad revenue comes from display, search and messaging on mobile devices. Facebook will continue to dwarf Twitter in ad revenue, but Twitter's numbers will be nothing to sneeze at. Twitter’s mobile ad revenue should hit $450 million in 2014, Facebook is expected to generate $1.5 billion and Google Inc. (Nasdaq:GOOG) should top both with $6.3 billion.

Ad numbers aside, both Facebook and Twitter have spend gobs of time and money on trying to emulate one another. Twitter is trying to expand beyond 140-character messages into services such as Facebook’s Instagram or Snapchat, which have gained in popularity. Earlier this year, Twitter introduced Vine, which lets users share brief videos. Vine’s popularity has surged even as Facebook’s Instagram introduced a rival video-sharing feature. Facebook has plenty of challenges as well. The pricey and elusive quarry that is the new killer, traffic-generating app has at times eluded the company. Some of its high profile new features such as Graph Search, a semantic search engine, and the Android Cover Feed, which allowed users to browse their news feed via their lock screen, flopped.

Need more reasons for a hookup between the companies? Twitter feeds could provide Facebook users with a robust platform for keeping abreast of breaking news. Facebook could make Twitter more user-friendly.

For all its faults, Facebook is relatively simple to use for even the least tech-savvy users. The same can’t be said for Twitter. Many people find the whole process of “tweets” and “retweets” confusing. Of course, that’s not the case for everyone; millions of people post on information on their Twitter and Facebook accounts simultaneously, which is yet another reason why the companies should merge.

The Bottom Line

Slowing traffic growth could mean that Twitter will have difficulty in meeting Wall Street’s ever-increasing expectations. The company's shares are already sagging, putting them in acquisition range. Facebook, with its deep pockets and complementary business, could make an especially attractive candidate even considering Twitter's astronomic multiple.